Michael Kors Holdings Limited (Exact Name of Registrant as Specified in Its Charter)

Transcription

1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended or TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number Michael Kors Holdings Limited (Exact Name of Registrant as Specified in Its Charter) British Virgin Islands (State or other jurisdiction of incorporation or organization) 33 Kingsway London, United Kingdom WC2B 6UF (Address of Principal Executive Offices) (Registrant s telephone number, including area code: ) Securities registered or to be registered pursuant to Section 12(b) of the Act: Title of Each Class Ordinary Shares, no par value N/A (I.R.S. Employer Identification No.) Name of Each Exchange on which Registered New York Stock Exchange Securities registered or to be registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T ( of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes No Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer Accelerated filer Non-accelerated filer (Do not check if smaller reporting company) Smaller reporting company Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). As of July 30,, Michael Kors Holdings Limited had 193,421,983 ordinary shares outstanding. Yes No

2 TABLE OF CONTENTS No. PART I FINANCIAL INFORMATION Item 1. Financial Statements 3 Condensed Consolidated Balance Sheets (unaudited) as of and March 28, 3 Condensed Consolidated Statements Operations and Comprehensive Income (unaudited) for the three months ended and June 28, Condensed Consolidated Statements of Shareholders Equity (unaudited) for the three months ended 5 Condensed Consolidated Statements of Cash Flows (unaudited) for the three months ended and June 28, Notes to Condensed Consolidated Financial Statements (unaudited) 7 Item 2. Management s Discussion and Analysis of Financial Condition and Results of Operations 18 Item 3. Quantitative and Qualitative Disclosures About Market Risk 28 Item 4. Controls and Procedures 29 PART II OTHER INFORMATION Item 1. Legal Proceedings 29 Item 1A. Risk Factors 29 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 29 Item 6. Exhibits 30 Signatures 31 2 Page

3 MICHAEL KORS HOLDINGS LIMITED AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands, except share data) (Unaudited) March 28, Assets Current assets Cash and cash equivalents $ 808,540 $ 978,922 Receivables, net 252, ,419 Inventories 606, ,908 Deferred tax assets 28,214 27,739 Prepaid expenses and other current assets 118, ,443 Total current assets 1,813,851 2,017,431 Property and equipment, net 624, ,934 Intangible assets, net 68,899 61,541 Goodwill 14,005 14,005 Deferred tax assets 4,627 2,484 Other assets 31,092 33,498 Total assets $ 2,556,668 $ 2,691,893 Liabilities and Shareholders Equity Current liabilities Accounts payable $ 172,123 $ 142,818 Accrued payroll and payroll related expenses 38,706 62,869 Accrued income taxes 29,679 25,507 Deferred tax liabilities 3,585 3,741 Accrued expenses and other current liabilities 94,907 95,146 Total current liabilities 339, ,081 Deferred rent 94,843 88,320 Deferred tax liabilities 13,769 10,490 Other long-term liabilities 19,867 22,037 Total liabilities 467, ,928 Commitments and contingencies Shareholders equity Ordinary shares, no par value; 650,000,000 shares authorized; 207,184,790 shares issued and 193,372,032 outstanding at ; 206,486,699 shares issued and 199,656,833 outstanding at March 28, Treasury shares, at cost (13,812,758 shares at and 6,829,866 shares at March 28, ) (848,819) (497,724) Additional paid-in capital 662, ,732 Accumulated other comprehensive loss (67,624) (66,804) Retained earnings 2,343,116 2,168,761 Total shareholders equity 2,089,189 2,240,965 Total liabilities and shareholders equity $ 2,556,668 $ 2,691,893 See accompanying notes to consolidated financial statements. 3

4 MICHAEL KORS HOLDINGS LIMITED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (In thousands, except share and per share data) (Unaudited) Three Months Ended Net sales $ 947,259 $ 887,037 Licensing revenue 38,716 32,117 Total revenue 985, ,154 Cost of goods sold 382, ,521 Gross profit 603, ,633 Selling, general and administrative expenses 313, ,864 Depreciation and amortization 41,553 28,998 Total operating expenses 355, ,862 Income from operations 248, ,771 Other expense (income), net 825 (343) Interest expense (income), net 109 (41) Foreign currency losses 677 1,153 Income before provision for income taxes 247, ,002 Provision for income taxes 72,657 88,286 Net income $ 174,355 $ 187,716 Weighted average ordinary shares outstanding: Basic 196,977, ,749,572 Diluted 200,054, ,176,243 Net income per ordinary share: Basic $ 0.89 $ 0.92 Diluted $ 0.87 $ 0.91 Statements of Comprehensive Income: Net income $ 174,355 $ 187,716 Foreign currency translation adjustments 9,814 3,067 Net gains (losses) on derivatives (10,634) 1,464 Comprehensive income $ 173,535 $ 192,247 June 28, 2014 See accompanying notes to consolidated financial statements. 4

5 MICHAEL KORS HOLDINGS LIMITED AND SUBSIDIARIES CONSOLIDATED STATEMENT OF SHAREHOLDERS EQUITY (In thousands, except share data) (Unaudited) Accumulated Additional Other Ordinary Shares Paid-in Treasury Shares Comprehensive Retained Shares Amounts Capital Shares Amounts Loss Earnings Total Balance at March 28, 206,486,699 $ $ 636,732 (6,829,866) $ (497,724) $ (66,804) $ 2,168,761 $ 2,240,965 Net income 174, ,355 Comprehensive income (820) (820) Total comprehensive income 173,535 Forfeitures of restricted shares (8,252) Exercise of employee share options 706,343 4,946 4,946 Equity compensation expense 12,506 12,506 Tax benefits on exercise of share options 8,332 8,332 Purchase of treasury shares (6,982,892) (351,095) (351,095) Balance at 207,184,790 $ $ 662,516 (13,812,758 ) $ (848,819) $ (67,624 ) $ 2,343,116 $ 2,089,189 See accompanying notes to consolidated financial statements. 5

6 MICHAEL KORS HOLDINGS LIMITED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited) See accompanying notes to consolidated financial statements. 6 Three months Ended Cash flows from operating activities Net income $ 174,355 $ 187,716 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 41,553 28,998 Equity compensation expense 12,506 8,154 Deferred income taxes 1,623 (905) Amortization of deferred rent 502 1,537 Loss on disposal of fixed assets Amortization of deferred financing costs Tax benefits on exercise of share options (8,332) (18,686) Foreign currency losses Loss (income) earned on joint venture 907 (203) Change in assets and liabilities: Receivables, net 112,510 85,970 Inventories (80,627) (99,958) Prepaid expenses and other current assets (5,393) (4,020) Other assets 2,030 (190) Accounts payable 29,174 10,186 Accrued expenses and other current liabilities (6,063) 13,950 Other long-term liabilities 3,484 8,606 June 28, 2014 Net cash provided by operating activities 279, ,385 Cash flows from investing activities Capital expenditures (105,998) (73,187) Purchase of intangible assets (7,399) (4,504) Equity method investments (907) Net cash used in investing activities (114,304 ) (77,691 ) Cash flows from financing activities Repurchase of treasury shares (351,095) (1,037) Tax benefits on exercise of share options 8,332 18,686 Exercise of employee share options 4,946 5,173 Net cash (used in) provided by financing activities (337,817 ) 22,822 Effect of exchange rate changes on cash and cash equivalents 2,068 3,060 Net (decrease) increase in cash and cash equivalents (170,382) 170,576 Beginning of period 978, ,194 End of period $ 808,540 $ 1,141,770 Supplemental disclosures of cash flow information Cash paid for interest $ 190 $ 173 Cash paid for income taxes $ 61,351 $ 51,170 Supplemental disclosure of noncash investing and financing activities Accrued capital expenditures $ 25,610 $ 24,212

7 1. Business and Basis of Presentation MICHAEL KORS HOLDINGS LIMITED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Michael Kors Holdings Limited ( MKHL, and together with its subsidiaries, the Company ) was incorporated in the British Virgin Islands ( BVI ) on December 13, The Company is a leading designer, marketer, distributor and retailer of branded women s apparel and accessories and men s apparel bearing the Michael Kors tradename and related trademarks MICHAEL KORS, MICHAEL MICHAEL KORS, and various other related trademarks and logos. The Company s business consists of retail, wholesale and licensing segments. Retail operations consist of collection stores and lifestyle stores, including concessions and outlet stores, located primarily in the United States, Canada, Europe and Japan, as well as e-commerce. Wholesale revenues are principally derived from major department and specialty stores located throughout the United States, Canada and Europe. The Company licenses its trademarks on products such as fragrances, beauty, eyewear, leather goods, jewelry, watches, coats, men s suits, swimwear, furs and ties, as well as through geographic licenses. The interim consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States ( U.S. GAAP ) and include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. The consolidated financial statements as of, and for the three months ended and June 28, 2014, are unaudited. In addition, certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted. The interim financial statements reflect all normal and recurring adjustments, which are, in the opinion of management, necessary for a fair presentation in conformity with U.S. GAAP. The interim financial statements should be read in conjunction with the audited financial statements and notes thereto for the year ended March 28,, as filed with the Securities and Exchange Commission on May 27,, in the Company s Annual Report on Form 10-K. The results of operations for the interim periods should not be considered indicative of results to be expected for the full fiscal year. The Company utilizes a 52 to 53 week fiscal year ending on the Saturday closest to March 31. As such, the term Fiscal Year or Fiscal refers to the 52-week or 53-week period, ending on that day. The results for the three months ended and June 28, 2014, are based on 13-week periods. 2. Summary of Significant Accounting Policies Use of Estimates The preparation of financial statements in accordance with accounting principles generally accepted in the United States requires management to use judgment and make estimates that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The level of uncertainty in estimates and assumptions increases with the length of time until the underlying transactions are completed. The most significant assumptions and estimates involved in preparing the financial statements include allowances for customer deductions, sales returns, sales discounts and doubtful accounts, estimates of inventory recovery, the valuation of share-based compensation, valuation of deferred taxes and the estimated useful lives used for amortization and depreciation of intangible assets and property and equipment. Actual results could differ from those estimates. Reclassifications Certain reclassifications have been made to the prior periods financial information in order to conform to the current period s presentation. Seasonality The Company experiences certain effects of seasonality with respect to its wholesale and retail segments. The Company s wholesale segment generally experiences its greatest sales in our third and fourth fiscal quarters while its first fiscal quarter experiences the lowest sales. The Company s retail segment generally experiences greater sales during our third fiscal quarter as a result of Holiday season sales. In the aggregate, the Company s first fiscal quarter typically experiences significantly less sales volume relative to the other three quarters and its third fiscal quarter generally has higher sales volume relative to other three quarters. However, given the Company s recent growth, the effects of any seasonality are further muted by incremental sales related to its new retail stores, wholesale doors and shop-in-shops. 7

8 Derivative Financial Instruments The Company uses forward currency exchange contracts to manage its exposure to fluctuations in foreign currency for certain of its transactions. The Company in its normal course of business enters into transactions with foreign suppliers and seeks to minimize risks related to these transactions. The Company employs these forward currency contracts to hedge the Company s cash flows, as they relate to foreign currency transactions. Certain of these contracts are designated as hedges for accounting purposes, while others remain undesignated. All of the Company s derivative instruments are recorded in the Company s consolidated balance sheets at fair value on a gross basis, regardless of their hedge designation. The Company designates certain contracts related to the purchase of inventory that qualify for hedge accounting as cash flow hedges. Formal hedge documentation is prepared for all derivative instruments designated as hedges, including description of the hedged item and the hedging instrument, the risk being hedged, and the manner in which hedge effectiveness will be assessed prospectively and retrospectively. The effective portion of changes in the fair value for contracts designated as cash flow hedges is recorded in equity as a component of accumulated other comprehensive income (loss) until the hedged item effects earnings. When the inventory related to forecasted inventory purchases that are being hedged is sold to a third party, the gains or losses deferred in accumulated other comprehensive income (loss) are recognized within cost of goods sold. The Company uses regression analysis to assess effectiveness of derivative instruments that are designated as hedges, which compares the change in the fair value of the derivative instrument to the change in the related hedged item. Effectiveness is assessed on a quarterly basis and any portion of the designated hedge contracts deemed ineffective is recorded to foreign currency gain (loss). If the hedge is no longer expected to be highly effective in the future, future changes in the fair value are recognized in earnings. For those contracts that are not designated as hedges, changes in the fair value are recorded to foreign currency gain (loss) in the Company s consolidated statements of operations. The Company classifies cash flows relating to its derivative instruments consistently with the classification of the hedged item, within cash from operating activities. The Company is exposed to the risk that counterparties to derivative contracts will fail to meet their contractual obligations. In order to mitigate counterparty credit risk, the Company only enters into contracts with carefully selected financial institutions based upon their credit ratings and certain other financial factors, adhering to established limits for credit exposure. The aforementioned forward contracts generally have a term of no more than 12 months. The period of these contracts is directly related to the foreign transaction they are intended to hedge. Net Income per Share The Company s basic net income per ordinary share is calculated by dividing net income by the weighted average number of ordinary shares outstanding during the period. Diluted net income per ordinary share reflects the potential dilution that would occur if share option grants or any other potentially dilutive instruments, including restricted shares and units ( RSUs ), were exercised or converted into ordinary shares. These potentially dilutive securities are included in diluted shares to the extent they are dilutive under the treasury stock method for the applicable periods. Performance-based RSUs are included in diluted shares if the related performance conditions are considered satisfied as of the end of the reporting period and to the extent they are dilutive under the treasury stock method. The components of the calculation of basic net income per ordinary share and diluted net income per ordinary share are as follows (in thousands except share and per share data): Fiscal Years Ended June 28, 2014 Numerator: Net income $ 174,355 $ 187,716 Denominator: Basic weighted average shares 196,977, ,749,572 Weighted average dilutive share equivalents: Share options and restricted shares/units 3,077,473 3,426,671 Diluted weighted average shares 200,054, ,176,243 Basic net income per share $ 0.89 $ 0.92 Diluted net income per share $ 0.87 $ 0.91 Share equivalents of 1,811,380 shares and 39,546 shares for the three months ended and June 28, 2014, respectively, have been excluded from the above calculation due to their anti-dilutive effect. 8

9 Recent Accounting Pronouncements The Company has considered all new accounting pronouncements and has concluded that, with the exception of the below, there are no new pronouncements that are currently expected to have a material impact on results of operations, financial condition, or cash flows. In June 2014, the Financial Accounting Standards Board ( FASB ) issued Accounting Standards Update ( ASU ) No , Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period, ASU requires that a performance target under stock-based compensation arrangements that could be achieved after the service period is treated as a performance condition and not reflected in the grant-date fair value of the award. Rather, the related compensation cost should be recognized when it becomes probable that the performance targets will be achieved. ASU is effective beginning with the Company s fiscal year 2017, with early adoption and retrospective application permitted. The Company does not expect that ASU will have a significant impact on its consolidated financial statements. In May 2014, the FASB issued ASU No , Revenue from Contracts with Customers, which provides new guidance for revenues recognized from contracts with customers, and will replace the existing revenue recognition guidance. ASU No requires that revenue is recognized at an amount the company is entitled to upon transferring control of goods or services to customers, as opposed to when risks and rewards transfer to a customer. In July, the FASB approved a one-year deferral of the effective date for this standard and to make it effective for the interim reporting periods within the annual reporting period beginning after December 15, 2017, or beginning with the Company s fiscal year This standard may be applied retrospectively to all prior periods presented, or retrospectively with a cumulative adjustment to retained earnings in the year of adoption. The Company is currently evaluating the adoption method and the impact that ASU will have on its consolidated financial statements and related disclosures. 3. Receivables, net Receivables, net consist of (in thousands): March 28, Trade receivables: Credit risk assumed by factors/insured $261,934 $ 374,150 Credit risk retained by Company 62,504 67,530 Receivables due from licensees 13,228 11, , ,443 Less allowances: (85,164) (90,024) $252,502 $ 363,419 Receivables are presented net of allowances for sales returns, discounts, markdowns, operational chargebacks and doubtful accounts. Sales returns are determined based on an evaluation of current market conditions and historical returns experience. Discounts are based on open invoices where trade discounts have been extended to customers. Markdowns are based on retail sales performance, seasonal negotiations with customers, historical deduction trends and an evaluation of current market conditions. Operational chargebacks are based on deductions taken by customers, net of expected recoveries. Such provisions, and related recoveries, are reflected in net sales. The allowance for doubtful accounts is determined through analysis of periodic aging of receivables for which credit risk is not assumed by the factors, or which are not covered by insurance, and assessments of collectability based on an evaluation of historic and anticipated trends, the financial conditions of the Company s customers and the impact of general economic conditions. The past due status of a receivable is based on its contractual terms. Amounts deemed uncollectible are written off against the allowance when it is probable the amounts will not be recovered. Allowances for doubtful accounts were $1.0 million and $0.7 million, at and March 28,, respectively. 9

10 4. Property and Equipment, net Property and equipment, net consist of (in thousands): March 28, Leasehold improvements $ 331,531 $ 294,225 In-store shops 202, ,308 Furniture and fixtures 174, ,178 Computer equipment and software 121, ,372 Equipment 75,034 73,609 Land 15, , ,692 Less: accumulated depreciation and amortization (369,760) (337,755) 550, ,937 Construction-in-progress 73,832 78,997 $ 624,194 $ 562,934 Depreciation and amortization of property and equipment for the three-month periods ended and June 28, 2014 was $39.7 million and $27.4 million, respectively. 5. Current Assets and Current Liabilities Prepaid expenses and other current assets consist of the following (in thousands): March 28, Prepaid taxes $ 65,475 $ 60,637 Unrealized gains on forward foreign exchange contracts 8,928 25,004 Leasehold incentive receivable 8,573 12,289 Prepaid rent 13,868 11,681 Other 21,301 17,832 $ 118,145 $127,443 Accrued expenses and other current liabilities consist of the following (in thousands): March 28, Other taxes payable $23,210 $ 20,202 Accrued rent 22,750 27,058 Advance royalties 7,382 5,081 Accrued litigation 6,254 5,539 Accrued advertising 6,035 5,653 Professional services 4,372 7,347 Accrued samples Unrealized loss on forward foreign exchange contracts Other 24,278 22,850 $94,907 $ 95,146 10

11 6. Credit Facilities Senior Unsecured Revolving Credit Facility On February 8, 2013, the Company entered into a senior unsecured credit facility ( 2013 Credit Facility ). Pursuant to the agreement, the 2013 Credit Facility provides for up to $200.0 million of borrowings, and expires on February 8, The agreement also provides for loans and letters of credit to the Company s European subsidiaries of up to $100.0 million. The 2013 Credit Facility contains financial covenants, such as requiring an adjusted leverage ratio of 3.5 to 1.0 (with the ratio being total consolidated indebtedness plus 8.0 times consolidated rent expense to EBITDA plus consolidated rent expense) and a fixed charge coverage ratio of 2.0 to 1.0 (with the ratio being EBITDA plus consolidated rent expense to the sum of fixed charges plus consolidated rent expense), restricts and limits additional indebtedness, and restricts the incurrence of additional liens and cash dividends. As of, the Company was in compliance with all covenants related to this agreement. Borrowings under the 2013 Credit Facility accrue interest at the rate per annum announced from time to time by the agent based on the rates applicable for deposits in the London interbank market for U.S. dollars or the applicable currency in which the loans are made (the Adjusted LIBOR ) plus an applicable margin. The applicable margin may range from 1.25% to 1.75%, and is based, or dependent upon, a particular threshold related to the adjusted leverage ratio calculated during the period of borrowing. The 2013 Credit Facility requires an annual facility fee of $0.1 million and an annual commitment fee of 0.25% to 0.35% on the unused portion of the available credit under the facility. As of and March 28,, there were no borrowings outstanding under the 2013 Credit Facility. At, stand-by letters of credit of $10.9 million were outstanding. The amount available for future borrowings under the agreement was $189.1 million as of. 7. Commitments and Contingencies In the ordinary course of business, the Company is party to various legal proceedings and claims. Although the outcome of such items cannot be determined with certainty, the Company s management does not believe that the outcome of all pending legal proceedings in the aggregate will have a material adverse effect on its cash flow, results of operations or financial position. 8. Fair Value of Financial Instruments Financial assets and liabilities are measured at fair value using the three-level valuation hierarchy for disclosure of fair value measurements. The determination of the applicable level within the hierarchy of a particular asset or liability depends on the inputs used in the valuation as of the measurement date, notably the extent to which the inputs are market-based (observable) or internally derived (unobservable). Observable inputs are inputs that market participants would use in pricing the asset or liability developed based on market data obtained from independent sources. Unobservable inputs are inputs based on a company s own assumptions about market participant assumptions developed based on the best information available in the circumstances. The hierarchy is broken down into three levels based on the reliability of inputs as follows: Level 1 Valuations based on quoted prices in active markets for identical assets or liabilities that a company has the ability to access at the measurement date. Level 2 Valuations based on quoted inputs other than quoted prices included within Level 1, that are observable for the asset or liability, either directly or indirectly through corroboration with observable market data. Level 3 Valuations based on inputs that are unobservable and significant to the overall fair value measurement. At and March 28,, the fair values of the Company s foreign currency forward contracts, the Company s only derivative instruments, were determined using broker quotations, which were calculations derived from observable market information: the applicable currency rates at the balance sheet date and those forward rates particular to the contract at inception. The Company makes no adjustments to these broker obtained quotes or prices, but assesses the credit risk of the counterparty and would adjust the provided valuations for counterparty credit risk when appropriate. The fair values of the forward contracts are included in prepaid expenses and other current assets, and in accrued expenses and other current liabilities in the consolidated balance sheets, depending on whether they represent assets or (liabilities) to the Company, as detailed in Note 9. All contracts are measured and recorded at fair value on a recurring basis and are categorized in Level 2 of the fair value hierarchy, as shown in the following table (in thousands): 11

12 Fair value at, using: Significant other observable Quoted prices in active markets for Significant unobservable Fair value at March 28,, using: Significant other observable Quoted prices in active markets for Significant unobservable identical assets (Level 1) inputs (Level 2) inputs (Level 3) identical assets (Level 1) inputs (Level 2) inputs (Level 3) Foreign currency forward contracts- Euro $ $ 8,546 $ $ $ 23,590 $ Foreign currency forward contracts- Canadian Dollar 382 1,404 Foreign currency forward contracts- U.S. Dollar (157) (590) Total $ $ 8,771 $ $ $ 24,404 $ The Company s cash and cash equivalents, accounts receivable and accounts payable, are recorded at carrying value, which approximates fair value. Borrowings under the 2013 Credit Facility, if outstanding, are recorded at carrying value, which resembles fair value due to the shortterm nature of the revolving 2013 Credit Facility. 9. Derivative Financial Instruments The Company uses forward currency exchange contracts to manage its exposure to fluctuations in foreign currency for certain of its transactions. The Company in its normal course of business enters into transactions with foreign suppliers and seeks to minimize risks related to certain forecasted inventory purchases by using foreign currency forward exchange contracts. The Company only enters into derivative instruments with highly credit-rated counterparties. The Company s derivative financial instruments are not currently subject to master netting arrangements. The Company does not enter into derivative contracts for trading or speculative purposes. The following table details the fair value of the Company s derivative contracts, which are recorded on a gross basis in the consolidated balance sheets as of and March 28, (in thousands): Fair Values Notional Amounts Current Assets (1) Current Liabilities (2) March 28, March 28, March 28, Designated forward currency exchange contracts $ 295,785 $ 226,090 $ 8,546 $ 23,590 $ 137 $ 522 Undesignated forward currency exchange contracts 12,264 25, , Total $ 308,049 $ 251,878 $ 8,928 $ 25,004 $ 157 $ 600 (1) Recorded within prepaid expenses and other current assets in the Company s audited consolidated balance sheets. (2) Recorded within accrued expenses and other current liabilities in the Company s audited consolidated balance sheets. Changes in the fair value of the effective portion of the Company s forward foreign currency exchange contracts that are designated as accounting hedges are recorded in equity as a component of accumulated other comprehensive income, and are reclassified from accumulated other comprehensive income into earnings when the items underlying the hedged transactions are recognized into earnings, as a component of cost of sales within the Company s consolidated statements of operations. The following table summarizes the impact of the effective portion of gains and losses of the forward contracts designated as hedges for the three-month periods ended and June 28, 2014 (in thousands): Pre-Tax Loss Recognized in OCI (Effective Portion) into Earnings (Effective Portion) Pre-Tax Gain Recognized in OCI (Effective Portion) into Earnings (Effective Portion) Forward currency exchange contracts (11,706) (48) $ 539 $ (1,134) Amounts related to ineffectiveness were not material during all periods presented. The Company expects that substantially all of the amounts currently recorded in accumulated other comprehensive loss will be reclassified into earnings during the next twelve months, based upon the timing of inventory purchases and turns. These amounts are subject to fluctuations in the applicable currency exchange rates. 12 Three Months Ended June 28, 2014 Pre-Tax Loss Reclassified from Accumulated OCI Pre-Tax Loss Reclassified from Accumulated OCI

13 During the three-month periods ended and June 28, 2014, the Company recognized $1.0 million and $0.8 million, respectively, in losses related to the change in the fair value of undesignated forward currency exchange contracts within foreign currency gains (losses) in the Company s consolidated statement of operations. 10. Shareholders Equity Share Repurchase Program On October 30, 2014, the Company s Board of Directors authorized a $1.0 billion share repurchase program, which authorized the repurchase of the Company s shares for a period of two years. On May 20,, the Company s Board of Directors authorized the repurchase of up to an additional $500 million under the Company s existing share repurchase program and extended the program through May During the three months ended, the Company repurchased 6,960,352 shares at a cost of $350.0 million under its current share-repurchase program through open market transactions. As of, the remaining availability under the Company s share repurchase program was $658.1 million. The Company also has in place a withhold to cover repurchase program, which allows the Company to withhold ordinary shares from certain executive officers to satisfy minimum tax withholding obligations relating to the vesting of their restricted share awards. During the three-month periods ended and June 28, 2014, the Company withheld 22,540 shares and 11,022 shares, respectively, at a cost of $1.1 million and $1.0 million, respectively, in satisfaction of minimum tax withholding obligations relating to the vesting of restricted share awards. 11. Accumulated Other Comprehensive Income The following table details changes in the components of accumulated other comprehensive income, net of taxes for the three-month periods ended and June 28, 2014, respectively (in thousands): Foreign Currency Net Gains (Losses) on Total Accumulated Other Translation Income (Loss) Derivatives (1) Comprehensive Income (Loss) Balance at March 29, 2014 $ (4,775) $ (1,598) $ (6,373) Other comprehensive income before reclassifications 3, ,535 Less: amounts reclassified from AOCI to earnings (2) (996) (996) Other comprehensive income net of tax 3,067 1,464 4,531 Balance at June 28, 2014 $ (1,708 ) $ (134) $ (1,842) Balance at March 28, $ (96,068) $ 29,264 (66,804) Other comprehensive income (loss) before reclassifications 9,814 (10,642) (828) Less: amounts reclassified from AOCI to earnings (2) (8) (8) Other comprehensive income (loss) net of tax 9,814 (10,634 ) (820) Balance at $ (86,254 ) $ 18,630 $ (67,624 ) (1) Accumulative other comprehensive income balance related to net gains on derivative financial instruments as of and March 28, is net of tax provisions of $2.3 million and $3.3 million, respectively. Other comprehensive loss before reclassification related to derivative financial instruments for the three months ended is net of a tax benefit of $1.0 million. Tax effects related to all other amounts were not material. (2) Reclassified amounts relate to the Company s forward foreign currency exchange contracts for inventory purchases and are recorded within Cost of goods sold in the Company s consolidated statements of operations. The related tax effects recorded within income tax expense in the Company s consolidated statements of operations were not material. 12. Share-Based Compensation The Company issues equity grants to certain employees and directors of the Company at the discretion of the Company s Compensation Committee. The Company has two equity plans, one adopted in Fiscal 2008, the Michael Kors (USA), Inc. Stock Option Plan (as amended and restated, the 2008 Plan ), and the other adopted in the third fiscal quarter of Fiscal 2012, the Michael Kors Holdings Limited Omnibus Incentive Plan (the 2012 Plan ). The 2008 Plan only provided for grants of share options and was authorized to issue up to 23,980,823 ordinary shares. As of, there were no shares available to grant equity awards under the 2008 Plan. The 2012 Plan allows for grants of share options, restricted shares and restricted share units, and other equity awards, and authorizes a total issuance of up to 15,246,000 ordinary shares. At, there were 9,170,884 ordinary shares available for future grants of equity awards under the 2012 Plan. Option grants issued from the 2008 Plan generally expire ten years from the date of the grant, and those issued under the 2012 Plan generally expire seven years from

14 the date of the grant. 13

15 Share Options Share options are generally exercisable at no less than the fair market value on the date of grant. The Company has issued two types of option grants, those that vest based on the attainment of a performance target and those that vest based on the passage of time. Performancebased share options may vest based upon the attainment of one of two performance measures. One performance measure is an individual performance target, which is based upon certain performance targets unique to the individual grantee, and the other measure is a company-wide performance target, which is based on a cumulative minimum growth requirement in consolidated net equity. The individual performance target vests 20% of the total option grant each year the target is satisfied. The individual has ten years in which to achieve five individual performance vesting tranches. The company-wide performance target must be achieved over the ten-year term. Performance is measured at the end of the term, and any unvested options vest if the target is achieved. The Company-wide performance target is established at the time of the grant. The target metrics underlying individual performance vesting requirements are established for each recipient each year up until such time as the grant is fully vested. Options subject to time-based vesting requirements become vested in four equal increments on each of the first, second, third and fourth anniversaries of the date on which such options were awarded. The following table summarizes the share option activity during the three months ended : Number of Options Weighted Average Exercise price Outstanding at March 28, 7,187,003 $ Granted 511,281 $ Exercised (706,343) $ 6.79 Canceled/forfeited (22,955) $ Outstanding at 6,968,986 $ The weighted average grant date fair value for options granted during the three months ended and June 28, 2014 was $14.37 and $29.20 respectively. The following table represents assumptions used to estimate the fair value of options: Three Months Ended Expected dividend yield 0.0% 0.0% Volatility factor 31.1% 33.3 % Weighted average risk-free interest rate 1.6% 1.5% Expected life of option 4.75 years 4.75 years June 28, 2014 Restricted Shares and Restricted Share Units The Company grants restricted shares and restricted share units at the fair market value on the date of the grant. Expense for restricted share awards is based on the closing market price of the Company s shares on the date of grant and is recognized ratably over the vesting period, which is generally three to four years from the date of the grant, net of expected forfeitures. Restricted share grants generally vest in equal increments on each of the four anniversaries of the date of grant. In addition, the Company grants two types of restricted share unit ( RSU ) awards: time-based RSUs and performance-based RSUs. Time-based RSUs generally vest in full either on the first anniversary of the date of the grant, or in equal increments on each of the four anniversaries of the date of grant. Performance-based RSUs vest in full on the three-year anniversary of the date of grant, subject to the employee s continued employment during the vesting period and only if certain pre-established cumulative performance targets are met at the end of the three-year performance period. Expense related to performance-based RSUs is recognized ratably over the three-year performance period, net of forfeitures, based on the probability of attainment of the related performance targets. The potential number of shares that may be earned ranges between 0%, if the minimum level of performance is not attained, and 150%, if the level of performance is at or above the pre-determined maximum achievement level. 14

16 The following table summarizes the restricted share activity during the three months ended : Restricted Shares Number of Unvested Weighted Average Grant Date Fair Value Restricted Shares Unvested at March 28, 770,592 $ Granted $ Vested (132,565) $ Canceled/forfeited (8,252) $ Unvested at 629,775 $ The following table summarizes the restricted share unit activity during the three months ended : Number of Restricted Share Units Service-based Weighted Average Grant Date Fair Value Number of Restricted Share Units Performance-based Weighted Average Grant Date Fair Value Unvested at March 28, 35,940 $ ,201 $ Granted 801,751 $ ,476 $ Vested $ $ Canceled/forfeited (318) $ $ Unvested at 837,373 $ ,677 $ Compensation expense attributable to share-based compensation for the three months ended and June 28, 2014 was $12.5 million and $8.2 million, respectively. The associated tax benefits recognized during the three months ended and June 28, 2014 were $5.0 million and $3.0 million, respectively. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The Company estimates forfeitures based on its historical forfeiture rate to date. The estimated value of future forfeitures for equity grants as of is approximately $2.6 million. 13. Segment Information The Company operates its business through three operating segments Retail, Wholesale and Licensing which are based on its business activities and organization. The operating segments are segments of the Company for which separate financial information is available and for which operating results are evaluated regularly by executive management in deciding how to allocate resources, as well as in assessing performance. The primary key performance indicators are net sales or revenue (in the case of Licensing) and operating income for each segment. The Company s reportable segments represent channels of distribution that offer similar merchandise, customer experience and sales/marketing strategies. The Company s Retail segment includes sales through the Company owned stores, including Collection, Lifestyle including concessions, and outlet stores located throughout North America, Europe, and Japan, as well as the Company s e-commerce sales. Products sold through the Retail segment include women s apparel, accessories (which include handbags and small leather goods such as wallets), footwear and licensed products, such as watches, jewelry, fragrances and beauty, and eyewear. The Wholesale segment includes sales primarily to major department stores and specialty shops throughout North America, Europe and Asia. Products sold through the Wholesale segment include accessories (which include handbags and small leather goods such as wallets), footwear and women s and men s apparel. We also have wholesale arrangements pursuant to which we sell products to certain of our licensees, including our licensees in Asia (which were previously reported within our North American wholesale operations). The Licensing segment includes royalties earned on licensed products and use of the Company s trademarks, and rights granted to third parties for the right to sell the Company s products in certain geographic regions such as the Middle East, Eastern Europe, Latin America and the Caribbean, throughout all of Asia (excluding Japan), as well as Australia. All intercompany revenues are eliminated in consolidation and are not reviewed when evaluating segment performance. Corporate overhead expenses are allocated to the segments based upon specific usage or other allocation methods. 15

17 The Company has allocated $12.1 million and $1.9 million of its recorded goodwill to its Wholesale and Licensing segments, respectively. The Company does not have identifiable assets separated by segment. The following table presents the key performance information of the Company s reportable segments (in thousands): Three Months Ended June 28, 2014 Revenue: Net sales: Retail $ 523,300 $480,242 Wholesale 423, ,795 Licensing 38,716 32,117 Total revenue $ 985,975 $919,154 Income from operations: Retail $ 120,874 $142,689 Wholesale 106, ,652 Licensing 21,439 16,430 Income from operations $ 248,623 $276,771 Depreciation and amortization expense for each segment are as follows (in thousands): Three Months Ended June 28, 2014 Depreciation and amortization: Retail $ 25,091 $ 17,965 Wholesale 16,102 10,775 Licensing Total depreciation and amortization $ 41,553 $ 28,998 Total revenue (as recognized based on country of origin), and long-lived assets by geographic location of the consolidated Company are as follows (in thousands): Three Months Ended June 28, 2014 Revenues: North America (U.S. and Canada) (1) $ 727,295 $718,889 Europe 216, ,497 Other regions 41,867 14,768 Total revenues $ 985,975 $919,154 16

18 As of March 28, Long-lived assets: North America (U.S. and Canada) (1) $ 468,355 $443,816 Europe 208, ,243 Other regions 16,390 11,416 Total Long-lived assets $ 693,093 $624,475 (1) Net revenues earned in the U.S. during the three months ended and June 28, 2014 were $684.8 million and $674.3 million, respectively. Long-lived assets located in the U.S. as of and March 28, were $441.9 million and $418.8 million, respectively. 14. Agreements with Shareholders and Related Party Transactions The Company s Chief Creative Officer, Michael Kors, and the Company s Chief Executive Officer, John Idol, have an ownership interest in Michael Kors Far East Holdings Limited, a BVI company. On April 1, 2011, the Company entered into certain licensing agreements with certain subsidiaries of Michael Kors Far East Holdings Limited (the Licensees ), which provide the Licensees with certain exclusive rights for use of the Company s trademarks within China, Hong Kong, Macau and Taiwan, and to import, sell, advertise and promote certain of the Company s products in these regions, as well as to own and operate stores which bear the Company s tradenames. The agreements between the Company and the licensees expire on March 31, 2041, and may be terminated by the Company at certain intervals if certain minimum sales benchmarks are not met. During the three months ended and June 28, 2014, there were approximately $1.7 million and $0.8 million, respectively, of royalties earned under these agreements. These royalties were driven by Licensee sales (of the Company s goods) to their customers of approximately $38.3 million and $19.6 million for the three months ended and June 28, 2014, respectively. In addition, the Company sells certain inventory items to the Licensees through its wholesale segment at terms consistent with those of similar licensees in the region. During the three months ended and June 28, 2014, amounts recognized as net sales in the Company s consolidated statements of operations and comprehensive income related to these sales were approximately $16.0 million and $6.2 million, respectively. As of and March 28,, the Company s total accounts receivable from this related party were $16.5 million and $6.5 million, respectively. 15. Subsequent Events The Company has historically accounted for its investment in its Latin American joint venture, MK (Panama) Holdings, S.A. and subsidiaries ( MK Panama ), under the equity method of accounting. In July, the Company made a capital contribution to the joint venture, obtaining a controlling interest in MK Panama. As such, the Company will consolidate MK Panama into its operations beginning with the second quarter of Fiscal The Company is currently in the process of finalizing the new ownership structure and accounting. 17

19 MANAGEMENT S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following Management s Discussion and Analysis ( MD&A ) of our Financial Condition and Results of Operations should be read in conjunction with the consolidated financial statements and notes thereto included as part of this interim report. This discussion contains forward-looking statements that are based upon current expectations. We sometimes identify forward-looking statements with such words as may, expect, anticipate, estimate, seek, intend, believe or similar words concerning future events. The forward-looking statements contained herein, include, without limitation, statements concerning future revenue sources and concentration, gross profit margins, selling and marketing expenses, capital expenditures, general and administrative expenses, capital resources, new stores, additional financings or borrowings and additional losses and are subject to risks and uncertainties including, but not limited to, those discussed in this report that could cause actual results to differ materially from the results contemplated by these forward-looking statements. We also urge you to carefully review the risk factors set forth under Risk Factors in our Annual report on Form 10-K (File No ), filed on May 27,, with the Securities and Exchange Commission. Overview Our Business We are a growing global luxury lifestyle brand led by a world-class management team and a renowned, award-winning designer. Since launching his namesake brand over 30 years ago, Michael Kors has featured distinctive designs, materials and craftsmanship with a jet-set aesthetic that combines stylish elegance and a sporty attitude. Mr. Kors vision has taken the Company from its beginnings as an American luxury sportswear house to a global accessories, footwear and apparel company with a presence in over 100 countries. As a highly recognized luxury lifestyle brand in North America, with accelerating awareness in targeted international markets, we have experienced exceptional sales momentum and intend to continue along this course as we grow our business. We operate our business in three segments retail, wholesale and licensing and we have a strategically controlled global distribution network focused on company-operated retail stores, leading department stores, specialty stores and select licensing partners. As of, our retail segment included 354 North American retail stores (including concessions), 196 international retail stores (including concessions) throughout Europe and Japan and our e-commerce sites in the United States ( U.S. ) and Canada. As of, our wholesale segment included wholesale sales through approximately 2,283 department store doors and 261 specialty store doors in North America and wholesale sales through approximately 1,269 specialty store doors and 263 department store doors internationally. Our remaining revenue is generated through our licensing segment, through which we license to third parties certain production, sales and/or distribution rights. During the three months ended, our licensing segment accounted for approximately 3.9% of our total revenue and consisted of royalties earned on licensed products and our geographic licenses. We offer two primary collections: the Michael Kors luxury collection and the MICHAEL Michael Kors accessible luxury collection. The Michael Kors collection establishes the aesthetic authority of our entire brand and is carried by many of our retail stores, our e-commerce sites, as well as in the finest luxury department stores in the world. In 2004, we introduced the MICHAEL Michael Kors collection, which has a strong focus on accessories, in addition to offering footwear and apparel, and addresses the significant demand opportunity in accessible luxury goods. Taken together, our two collections target a broad customer base while retaining a premium luxury image. Certain Factors Affecting Financial Condition and Results of Operations Demand for Our Accessories and Related Merchandise. Our performance is affected by trends in the luxury goods industry, as well as shifts in demographics and changes in lifestyle preferences. While the luxury retail industry has been recently challenged by lower consumer traffic trends resulting from a decrease in tourist travel and restrained consumer spending, we expect that the demand for our products will continue to grow. Currency fluctuation and the Strengthening U.S. Dollar. Our consolidated operations are impacted by the relationships between our reporting currency, the U.S. dollar, and those of our non-u.s. subsidiaries whose functional/local currency is other than the U.S. dollar. The recent decline in the value of the Euro relative to the U.S. Dollar has impacted the conversion of the results of our European operations, as they are reported, which represent approximately 22% of our consolidated revenue. During the three months ended, the Euro experienced an approximate 20% decline in value relative to the U.S. Dollar, compared to the same prior year period. Our results have also been negatively impacted by an approximate decline of 11% in the Canadian Dollar and an approximate decline of 16% in Japanese Yen relative to the U.S. Dollar during the three months ended, compared to the same prior year period. We believe that these trends may continue for the remainder of the Fiscal